Credit crunch hits Indian power investment plans

13 August 2008 – Indian power companies are expected to delay billions of dollars of investment plans because depressed global markets are making it hard for them to raise the necessary financing, according to a new report cited by the Financial Times.

The Financial Times writes that investment plans totalling at least $10bn – including $4bn in equity and the remainder in debt – are facing delays, meaning that India could fall well short of an ambitious plan to add about 90 GW to its existing power-generating capacity of 145 GW by the end of 2012, the report from London-listed brokerage Arden Partners said.

Those companies affected could include Adani Power, a company with investment from the UK’s 3i Group which has filed a prospectus for an initial public offering expected to raise between $1bn to $1.5bn, and JSW Energy, which had been looking to raise a similar amount.

“We had thought the market might be headed towards oversupply but the credit crunch has removed the bubble,” said Guy Brown, engineering analyst with Arden Partners, a London-listed brokerage and research house.

India’s market for new equity offerings was the strongest in Asia at the beginning of the year, with Reliance Power, a power plant builder controlled by billionaire businessman Anil Ambani, raising $3bn in the country’s biggest listing.

In the year ending March, fundraising by the corporate sector for capital expenditure – for the purchase of plant, machinery and other capital goods, rose to a new high of 14.3 per cent of gross domestic product, or $168bn, according to Morgan Stanley economist Chetan Ahya.

But the market for new equity offerings has since all but dried up following a sharp fall in domestic stock prices. At the same time, the central bank, the Reserve Bank of India, keen to quell a surge in inflation to 13-year highs of about 12 per cent, has pushed benchmark interest rates to a seven-year high of 9 per cent.

With the tough global credit environment and high domestic rates, power companies and other investors in India’s infrastructure sector are being forced to scale back their endeavours.

“We believe the combined impact of slowing domestic consumption, higher domestic cost of capital and reduced capital access from international capital markets will result in a further major slowdown in the investment cycle over the next 12 months,” said Mr Ahya in a report.

He predicted that investment to gross domestic product would fall to 35.6 per cent in the fiscal year ending March, 2009 from 37 per cent a year earlier and would fall to 32 per cent in 2010.

Mr Brown said the Indian government’s five-year development plan had envisaged a sharp “step up” in electricity generation in 2012.